Let’s face it, it’s challenging to sock away money. But if you want to have a retirement fund in place, it is imperative you set goals and do your absolute best to meet them during every decade of adulthood.
By the time you reach the age of 40, you should have saved (and ideally invested) 15 percent of your annual income over time.
Take note: this is if you plan to live a modest retirement life.
If you’re hoping to live large, such as traveling to Europe or keeping newer model cars, that figure should be more.
In the bigger picture, you should aim to have a minimum of 10 times your final salary saved by the time you retire. This may sound daunting, but don’t despair. There are plenty of ways to develop and practice healthy money habits at any age.
However, the annual income percentage method is a tough calculation to use. Let's say you only started saving money at age 30. Does that mean you are on track if you saved 15% of your annual income from 30 to 40? Not quite.
Here is another metric to follow. According to Ally, you should save 3 times your yearly salary by age 40.
So, two rules of thumb to follow here:
If you earn $50,000 per year for example, you should save and invest 15% of that or $7,500 per year. By age 40, you should ideally have $150,000 saved and invested.
When it comes to actually saving your money, most experts recommend having something called an emergency fund. This is where you put your savings that you can draw from in case of emergency.
You should have an emergency fund that covers 6 months of all expenses.
Beyond that, it is wise to invest that money to earn a return. You don't want all of your money sitting there in cash earning next to nothing.
Keeping your money in a separate account ensures that you will not be tempted to spend it. You will also not see it every time you log on to your bank. Online savings accounts tend to have better rates than traditional banks, so that is something we recommend.
Betterment Cash Reserve is a great online savings account with a higher APY than most traditional banks. The minimum to open an account is just $10!
You should take full advantage of any retirement options available from your employer. For example, if they do a company match, you should take the free money! Beyond that, check out a Roth IRA. These are the best places to invest for retirement income.
For more near term goals, you may want to consider opening a brokerage account to invest your savings.
Here are some practical ways to rein in your spending and start approaching this financial milestone by age 40.
Monthly debt payments are the single largest obstacle to saving money. The average American household carries more than $135,000 in debt (including mortgage loans).
A whopping 75 percent of Americans are in debt.
Debt steadily chips away at your monthly income. Put the brakes on right away by cutting up your credit cards and buying solely with cash you have on hand. People are scarily reliant on plastic. The average credit card debt around $5,800 for households that carry a balance – which by the way is 43 percent!
Make a spreadsheet of your debts from small to large and put together a payment plan.
Set a goal to skip all non-essentials until your debt is paid off. It may help to track your spending item by item. Start by determining what’s essential and what is not.
Yes, you need to fill your gas tank to commute to work. But you definitely do not need the bagel and coffee in the convenience store when you go in to pay. You do need 3 square meals a day, but that doesn’t mean a macchiato first thing every morning, a super salad from the trendy lunch place, and take-out ethnic food for family dinner.
Put together a carefully crafted grocery list for meal prep items, and don’t allow yourself to be tempted by impulse items. Buy only what is on your list! Go solo to shop for groceries – yes, that means leave the kids home – because in this case, more is not merrier.
And, this goes without saying, avoid all situations where you are tempted to overspend, such as late-night Amazon sessions. Read a book, watch Netflix, or just turn in early for an extra hour of much needed sleep.
You may want a new pair of gym shoes, but aside from not being the newest, trendiest style, is there any other reason to replace your current ones?
Apply this same way of thinking to your vehicle, vacation and even your home. Many people continue to upgrade for reasons that are not related to necessity, such as keeping pace with others. Sure, you will have your neighbors turning green with envy over your new SUV, but those hefty monthly car payments will be enough to keep you tossing and turning every night trying to figure out how to make ends meet.
If you’re the average family, you’re probably spending around $675 a month on groceries.
If you are this average family, you most likely also have a well-stocked pantry full of pasta, beans, cereal, canned fruit and veggies. Challenge yourself and your family to save a week’s worth of groceries by being creative with what’s already on your shelves for dinner. Soup is a hearty meal and you can even make it yourself.
Use this same practice with soaps, toothpaste, and paper products. Sure, it’s fine to buy in bulk, but how many times have you bought more napkins forgetting you have a super pack at home? That new luxury brand shampoo looks enticing on an end cap at a drugstore, but you probably have two bottles of perfectly fine shampoo for your hair.
Put out those toothpaste and floss samples your dentist gives you at every visit. Resist the urge to stockpile and buy more!
Once you’ve emptied out your pantry and it is time to start stocking up again, change your mindset!
Generic items are sometimes half the cost of brand name products. Why is this? In most cases, the only thing that’s better about brand-name products is the marketing. Generic brands of medicine, personal care items, food items you eat every week, cleaning supplies and paper products will save you a ton of money, all of which can be put towards that retirement account savings you’re shooting for at age 40.
One of the best ways to curb impulse spending is by staying out of stores entirely. You can buy everything from dog biscuits to work boots to office supplies online. Just make sure you stick to a list, and for goodness sake, don’t do your shopping when you’re bored, hungry or tired.
Shop ONLY off your list of necessities.
Picking up grocery or drugstore items at the curb is a safe way to avoid tossing things in the shopping cart just because they look good on the shelves. It will let you bypass the bakery with the freshly baked Italian bread and the cute frosted cupcakes. Remember, “needs” take precedence over “wants.”
Most of us are paying for multiple subscriptions like Netflix, Hulu, Spotify, gym memberships, trendy subscription boxes for yourself or your pet, magazines you don’t even have the time to read – the list goes on and on. Now is the time to cancel any subscriptions you don’t use and probably won’t even miss if they are not in your life.
Another way to keep track of your expenses is to turn off auto-renewal whenever you make a purchase that requires monthly payments. When payments are withdrawn without you even looking at them, it’s too easy to lose track and become complacent.
By doing this, you can review what you are paying for monthly, and if it’s non-essential to you, by all means cancel. If you decide you can’t go without it, you can subscribe again – but make sure it fits into your budget and is a need, not a want.
Check out Trim, a free app that helps you keep track of and cancel unwanted subscriptions!
When you get a well-earned work bonus, inheritance or tax refund, resist the urge to spend on a splurge item you don’t need. Technically, this is money you’re receiving outside your budget, so you shouldn’t need it to cover everyday expenses, right?
Save and invest all unexpected (found) money that you receive.
Oh, the appeal of an email with lots of bells and whistles marketing a product or service, landing repeatedly in your inbox. The graphics are flashy, the photos are stellar, the description makes it sound like something you can’t live without. Then there are the flash sales, or coupons that seem to be made just for you (news flash: they’re not).
The best way to resist temptation to buy the newest gadget is to get off the email lists entirely. You know the drill: scroll down to the bottom and find the unsubscribe button, usually in microscopic text so it’s difficult to find.
Not only will you have more money in your wallet; you will also have less clutter in your email!
Be honest with yourself. How much unused clutter do you have stuffed into the extra closet, shed or garage? Set a timeline to sort through boxes and bins, and do your best to keep emotion out of the process. Those crystal wine glasses passed down from your mother? When’s the last time you used them (if ever)? You always wanted to commit to running, but that treadmill is currently being used to hang clothes on. Besides, you can run for free outside!
Lamps, end tables and seasonal décor seem to be the most hoarded items, and other people will pay good money to take them off your hands. Don’t make a garage sale your first step; list individual, valuable items on sites like Craig’s so you can make a good profit (and you won’t have to haggle over reducing a price by a buck).
Remember, this qualifies as found money, so stash it right into your savings/investment account to help reach your financial goals.
These days, YouTube can supply us with step-by-step video for everything from replacing a window to planting new shrubs to laying brick for a patio. Take advantage of this free information! For most projects, the larger portion of the price is for labor, not materials. There are some exceptions – do not try to replace your roof, for example – but jobs you can do safely and learn along the way are huge savings for your budget. Plus, you will have significant bragging rights.
Start with small steps, and once you see your progress, you will be more willing to make larger changes. Age 40 is the perfect time to get your finances in order, set goals, and work hard to meet them.